For the past nine years, the Milken Institute has put on an annual conference in Los Angeles that gathers several thousand business leaders, economists, and other experts to discuss the outlook for global capital markets. On Apr. 26, the institute's founder, former junk bond king Michael Milken, debated Wharton finance professor Jeremy Siegel, a leading expert on stock markets and the author of "Stocks for the Long Run." The topic: Baby Boom—Baby Bomb? The two men grappled with the impact boomers' impending retirement will have on stocks and bonds in the U.S. over the next few decades (see BW Online, 6/27/07, "Old. Smart. Productive."). BusinessWeek senior writer Aaron Bernstein listened in. Here are edited excerpts of what they had to say:
My interest in population and stock prices was piqued 8 to 10 years ago. An expert named Harry Dent used to day that everything about stock movements can be explained by population. I thought that sounded crazy. But as I gave speeches around the country, that was the most asked question I got. What happens when boomers retire and sell their assets? Are there enough people to absorb all that wealth?
I believe that over the next 50 years, the aging population is the most critical issue facing developed world. Life expectancy vs. retirement were 1.6 years apart in 1950, when they were 69 vs. 67. Today, that gap is 14.5 years. This trend can't continue.
The age wave is the most severe in Japan. By mid century, 75 to 80 will be most populous age group there, and the number of workers per retiree will fall to one-to-one. The big questions facing the developed world are, who's going produce the goods, and who's going buy the assets. If there are not enough workers earning income, then there aren't enough buyers of all the stocks and bonds that are going be sold. It's the flip side of same question.
I built a model to show how much longer Americans will have to work because of the coming shortage of workers. Life expectancy will continue to rise. But the retirement age will rise substantially more, I believe, from 62 today to 73 or 74 in the future. Of course, some say it will rise just because people live longer. But it has to rise more than that. The age Americans spend in retirement will shrink from 14.4 years today to 9.2 by mid century.
What can fix this problem? Productivity is one possibility. But even if productivity grows at 3.5% a year, it only buys a couple more years. What about immigration? How many people will the U.S. need to keep the retirement age at 62? About half a billion, according to my calculation. This is a lot of people.
Some people say I'm a pessimist. Well, I am if we just have to rely only on ourselves in the U.S. and Europe, because we have a lot of assets that have to be sold. I find that there will be a fall of 40% to 50% if we just rely on ourselves. But then there is the rest of the world, which is much younger. The number of people will decline in India and other developing countries, but not by much.
How does that help us, that the rest of the developing world is so young? Because the old sell to the young. It used to be in the family, and the clan, then in the state. Florida is the oldest state, but it has no aging problem, because they can sell into the U.S. market, where there are younger people who buy their assets and ship them goods. We'll be at a higher average age in 50 years, but we'll live in a younger world. We can sell our assets to the rest of the world, and they can ship us goods.
The population in the developed countries today is just 15% of the world total, and it has 56% of the world's GDP. In 2050, the population of developed countries, according to UN projections, will fall to 11%, and its share of GDP will shrink to 23%, with the other 77% coming in the developing world. Once we have that change, per capita incomes will rise to half our levels in China for example.
If we rely just on ourselves, people will have to work 12 years longer. But if we embed in global economy, we can sell assets to the developing world, and they can ship us goods. That is our best hope, and if we do that our retirement age will stabilize at 68.
This is the global solution. I'm writing a small book called that. If we just rely on ourselves, our capital markets can't absorb all our assets. However if we let the world work, then I'm more optimistic. Our markets will be healthy, which will ameliorate our situation. So I'm pessimistic only if we shut out the rest of the world. If we don't, I'm an optimist with respect to the markets.
There are two major trends in the world going on today. One, there's a growing middle class outside the U.S., which is where most of the world's population lives, and two, there's a chronologically aging population in the developed world. Most of the world's population is in Asia, which is 61% of the world, but it has only 29% of the world's land. It's the same with GDP, Asia is 30%.
By 2030, Asia will be 58% of the world's GDP. By 2050, China will be the largest economy, with 44.5% of world GDP vs. 35% in the U.S. India will be at 28%. India's and China's economies were much larger in 1820 than they are today. Back then, China was 29% of the world and India was 16%. The U.S. has been the unbelievable success story of the world since then. But 2050 will look a lot more like 1820.
Now look at wealth. Most accumulation has been in the last 200 years. Technology has driven it. Many people predicted more serious problems than who will buy our assets tomorrow. Mass starvation was predicted in the 1970s, when some said we can't feed all the people in the U.S. and around the world. In 1900, there were about 40 million people on American farms, so one person produced enough to feed two others. In 2000, there were 1.5 million living on our farms, and they feed 290 million here, plus 220 million more around the world. So each farmer feeds 340 others. The idea that we can't produce enough food is no longer in vogue.
Or look at technology. The iPod has 7,500 times the storage of IBM's largest computer in 1976. The new IBM (IBM
) chip has 2 trillion calculations per second. In 1974, it cost $100 million to sequence a gene. Today, it cost $3, and by 2013, it will be 3 cents.
We also constantly underestimate life expectancy. In Japan today, the quality of life lasts longer than anywhere else. They have 73.6 healthy years before becoming disabled (by old age), vs. 67.6 in the U.S. But even in the U.S. there have been big gains. The share of men in poor or fair health has gone from where it was at age 60 20 years ago to age 72 today. That's 12 years of increased quality of life. In 1970, a 59-year-old man had the same probability of dying as a 65-year-old today. The same is true with women. We're living longer and more productive lives.
So we're going to want to work longer. My mother could easily hold a job in her 80s today. This adds trillions to our wealth. Increases in life expectancy -- not quality of life but just life expectancy -- already has added $2.6 trillion to our economy, according to (University of Chicago economics professor) Kevin Murphy. And what if we cure more diseases? It will save billions more.
With all this wealth, the problem is not who's going buy assets, it's are there any assets to buy with all the liquidity in the world.
Take housing. We don't have efficient mortgage markets around the world, but we've had a $20 trillion increase in housing assets from 1997 to 2004. If developing countries can fully borrow, what are they going to buy? Where are the assets for them to buy?
The Milken Institute does a global capital access index every year, which shows China and India still low on the rankings. Imagine what will happen when they get access to capital. They're already growing at 8% to 10% without efficient capital markets.
The real issue is the rate of return. If it increases, it solves the problems. The issue will be, "Where can I invest?" not "Who's the buyer."
This trend already has begun. Already we're seeing ads saying, "Help wanted. We need older workers." The only offense is calling age 60 "older", instead of "mid-life."
The rest of the world is growing so quickly, they'll be looking for anything to buy.